Study: Investment in LNG Bunkering Could Lead to $850B Write-Down

The debate over the long-term viability and role that LNG will play in the shipping industry is being renewed with two new reports being released as part of the ongoing Climate Week meetings. One report cautions that regulatory efforts could leave the shipping industry with as much as $850 billion in stranded assets depending on the actions of policymakers driving shipping to decarbonization while the other calls into question the assumptions regarding a transition to bioLNG. The industry trade group SEA-LNG responded to the report from the International Council on Clean Transportation (ICCT) saying its data was outdated and understates the future availability of bioLNG for shipping.

Driving the renewal of the debate is the shipping industry’s continued rapid adoption of LNG as the preferred fuel source for new ships. Two-thirds of the current newbuilds due for delivery in the next three years will be capable of running on LNG, up from just 10 percent a few years ago. Earlier this year, DNV Maritime’s principal consultant, Martin Christian Wold, highlighted that orders for LNG-fueled ships were at a record pace. Data from DNV’s Alternative Fuel Insights shows that there are over 500 LNG-fueled vessels on order due for delivery by 2028, which would bring the global fleet to well over 800 vessels with an additional 229 LNG-ready vessels also on order for delivery by 2028. 

“If policies that incentivize shipping to decarbonize in line with the Paris Agreement were in place by the end of the decade, the LNG-capable fleet would compete against zero emissions shipping, whilst also being incentivized to switch away from the use of fossil fuel,” writes a new study by researchers at the University College London’s Energy Institute. The analysis suggests that more expensive LNG-capable vessels would see reductions in their value to match the value of similar aged but lower-cost conventional vessels designed to use fuel oil.  

“The longer we leave the LNG transition running and then switch, the more painful it will be,” says Marie Fricaudet, lead author and Ph.D. student at UCL Energy Institute. In the report, they attempt to quantify the potential and cost of stranded assets in the shipping industry as the energy transition progresses.

The report concludes that the shipping industry based on the current LNG newbuild orders could be forced to write down $850 billion in investment in the worst-case scenario as regulators take actions to drive the decarbonization of ships. Even if LNG-capable vessels are retrofitted to run on scalable zero emission fuels (hydrogen and hydrogen-derived fuels such as ammonia), they estimate the potential loss at approximately 15-25 percent of their value, anywhere between $128 billion and $210 billion depending on the growth of the LNG fleet.

“The least-cost pathway for shipping to meet its required shift away from fossil fuels is to a mix of electrification in short-sea shipping, and use of scalable hydrogen and hydrogen-derived fuels such as ammonia and methanol for deep-sea shipping,” according to the Energy Institute researchers.

The report says that there is still time to anticipate regulatory and technology developments and manage exposure to the potential for stranded value risk with vessels that might have their economic returns cut short by new regulations. They recommend that shipowners should consider not ordering LNG-capable ships and investing in conventionally fueled ships that are designed for retrofit to zero-emission fuels, or factor in the cost of future refits for LNG ships to ensure their long-term financial viability. 

While the Energy Institute research points to the need to have a transition path for LNG-fueled vessels, the ICCT questions the assumption that LNG ships can switch to bio and e-LNG in the future. Their research cites a potential lack of supply of renewable LNG to meet future demand and they anticipate that the costs of the fuel will be substantially higher. They cite predictions for a tripling of demand between 2019 and 2030 along with an estimate that the cost of renewable LNG will be more than seven times higher than fossil LNG in 2030.

SEA-LNG responds by saying that the ICCT overstates the costs and underestimates the supply of bioLNG. They cite higher current production levels according to the European Biogas Association without mentioning the investments planned by many companies to scale up future production. Addressing cost, SEA-LNG highlights that the majority of the cost is production for the common renewable hydrogen feedstock required for all e-fuels suggesting that all e-fuels will have similar costs.

The ICCT report transitions to the old argument over methane slip both from ships as well as along the production and supply chain. They contend that even using 100 percent renewable LNG doubles methane emissions compared to 2019, primarily because of methane slip from marine engines.

“For renewable LNG to significantly contribute to achieving climate goals, methane slip from marine engines needs to be virtually eliminated and methane leaks upstream need to be greatly reduced,” writes the ICCT. “Additionally, methane leaks from onboard fuel tanks and cargo tanks, which researchers are still working to adequately quantify, would need to be near zero.”

SEA-LNG repeats its previous points on methane slip arguing that the ICCT, along with other reports, is using data that fails to take account of the latest data on the technology available to LNG-fueled vessels. The trade group argues that new engine technology has reduced methane slip by over 75 percent since the fuel was first introduced. They also cite DNV data on the LNG orderbook that shows over half of LNG-fueled newbuilds will use the latest high-pressure 2-stroke engines, of which 70 percent will be high-pressure engines producing negligible methane slip. 

Methane slip remains the primary discussion for many reports focusing on LNG. Beyond the progress by engine manufacturers, the issue of the release of unburnt methane has become a focal point for several research efforts. In July, a coalition from the shipping industry announced the latest research study to develop a means to quantify and reduce methane emissions, while researchers in Japan and scrubber manufacturers are working on technologies to capture methane from a vessel’s exhaust.